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spk04: Hello everyone and welcome to the SES AI Corporation third quarter earnings conference call. My name is Bruno and I'll be operating your call today. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. I will now hand over to your host, Eric Goldstein, Vice President of Investor Relations. Please go ahead.
spk06: Thank you, Operator. Hello everyone and welcome to our conference call covering our third quarter earnings 2023 Results and Financial Guidance for 2023. Joining me today are Chi Chow Hu, Founder and Chief Executive Officer, and Jing Mielis, Chief Financial Officer. We issued our shareholder letter earlier this morning, which provides a business update as well as our financial results. You'll find a press release with a link to our shareholder letter in today's conference call webcast in the investor relations section of our website at ses.ai. Before we get started, this is a reminder that the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. These statements are based on our predictions and expectations as of today. Such statements involve certain risks, assumptions, and uncertainties which may cause our actual or future results and performance to be materially different from those expressed or implied in these statements. The risks and uncertainties that could cause our results to differ materially from our current expectations include, but are not limited to, those detailed in our latest earnings release and in our SEC filings. This morning, we will review our business as well as results for the quarter. With that, I will pass it over to Chi-Chao.
spk09: Thanks, Eric. Earlier this year, we laid out the goal to transition to B-samples, and I'm happy to report we're almost there. We expect to sign a B-sample joint development agreement, JDA, with one of our OEM customers in the next few weeks. This will be the world's first automotive B sample for lithium metal. This will be a historic milestone for SCS, for the battery industry, and for the future of transportation. We had to overcome monumental challenges to get to this point. One of the most important challenges was safety. And we're not talking about lab-scale safety. We are talking about practical, real-world safety. In the battery industry, there's an inherent trade-off between energy density and safety. Many companies improve safety by using safer chemistries, such as lithium iron phosphate, LFP cathodes, or cellulose electrolytes. LFP is indeed safer than high nickel cathodes. And in theory, cellulose appears to be less volatile than liquid lithium metal. So why don't we switch to these safer chemistries? While these safer chemistries appear to improve safety, we believe they make unacceptable compromises to energy density, manufacturability, and other important parameters. For example, an LFP cathode has about half the energy density of a high nickel cathode. And solid-state has yet to prove its manufacturability and performance in a cell that can actually be used in a real-world application. So what's the point? We don't want our cells to be impractical, but safe. We want our cells to be alive, powerful, and safe. Our goal all along has been to improve safety without any compromises to other parameters. We start with a high energy density approach that has inherently higher safety risk than a lower energy density solution. And we make it safe. It's extremely difficult, but we have always chosen to do things the hard way. That is what we will have achieved to qualify for automotive B sample for liquid metal. No one thought lithium metal with a high nickel cathode would achieve the level of practical safety that we recently demonstrated in our internal testing. This was a culmination of very exciting fundamental breakthroughs in materials and engineering. Even advanced lithium ion with a high nickel cathode can have severe safety risks, and we believe our advancements address the safety issues in both lithium ion and lithium metal. For example, our new high nickel cathode active materials have the same capacity as equivalent traditional high nickel cathodes, but are much more stable. Our new cathode electrode coating and treatment process allows the same cathode to pass rigorous safety tests, including nail penetration and heating. As new power cell engineering with a self-denting mechanism that allows gradual safe release of energy during thermal runaway, a new electrolyte that is safer with no compromise on performance, a new protected lithium-ion anode, and a new charging protocol that improves overall safety. These are fundamental breakthroughs in both engineering and materials, not just for lithium metal, but also for lithium-ion, especially our developments in the catalyst. We are now able to delay the thermal runaway onset temperature and reduce peak temperature and pressure during thermal runaway significantly. Some companies that are in earlier stage of lithium metal development talk about dreams of perfectly safe batteries. In most cases, the battery capacity or energy density is so low that it's useless. To be an automotive B sample, which we believe is the most advanced in metal development anywhere in the world, we deal with practical safety concerns, not dreams on paper. It's exhilarating to see our batteries during safety tests going from big explosions to small explosions to big fires to small fires to just smoke. It feels like witnessing a successful rocket launch after many failures. We recently completed our second testing bunker. Now we have even greater resource to test new things. For many people, risk means danger and should be avoided. For us, risk means innovation and we embrace risk by creating a safe environment to test unsafe things. Without these bunkers, without this safe environment to test unsafe things, we will not be able to understand the mechanism. will not be able to make unsafe things safe and next generation batteries and transportation will not be able to move forward at our upcoming battery world 2023 in december we will demonstrate some exciting videos of high energy density liquid metal batteries passing very rigorous safety tests we never thought we could achieve such safety while maintaining high energy density This is a big milestone towards our goal of commercializing large capacity, high energy density lithium-ion cells for automotive applications. In terms of manufacturability, last quarter, we indicated we will increase our A sample lines to 1,000 large capacity 100-amp-hour cells per line per month from approximately 500 per month. November will be the first month that we will attempt to build 1,000 A-sample 100 mCov cells at our Chungju line in Korea. These cells will be used for both internal testing and OEM sample qualification and avatar safety prediction algorithm training. We currently have three A-sample lines in operation and two B-sample lines under preparation, one line for an EV application and one for a UAM application. For the two B sample lines, we are in the final stages of completing our vendor qualification review. We expect to continue to use the A sample lines for B sample cell development until the new B sample lines become operational, which we expect to occur in 2024. By running our lines up to 1,000 large 100-amp-hour cells per month, We will also gain valuable experience in avatar cell traceability and quality system development. We have even hired a dedicated field data collection team to help ensure that the data are correct and collected through the correct process. This team helps our avatar algorithm safety prediction tremendously by providing verifiable and complete data. In summary, earlier this year, we established a milestone to transition to B-sample. and we are almost there. This is a major milestone for us and for the battery and transportation industry, and it's a result of solid, fundamental, hardcore material chemistry and cell engineering breakthroughs in safety for high-energy density lithium metal batteries with a high nickel capital. From A-sample to B-sample JDAs with EVOEMs, The most important value of these JDAs is helping us build a solid foundation in technology development, process development, engineering development, quality development, and manufacturing development. With this solid foundation, we're now able to expand into other applications that are ideal for our unique high energy density and high power density lithium metal batteries, such as drones and urban air mobility, UAMs. These applications also represent early-stage commercialization opportunities for us. We are very excited about the UAM opportunity and believe that lithium metal will enable UAM in the 2020s the same way that lithium-ion enabled portable consumer electronics 30 years ago in the 1990s. The world's first lithium metal B sample will be a small step for FCS but has the potential to be a giant milestone for the future of sustainable transportation, both on land and in air. Now I'll hand the call over to Jun.
spk02: Thank you, Chi-Chao. Good afternoon, everyone. Today I will cover our third quarter financial results and discuss our operating and capital budgets for full year 2023. In the third quarter, our operating expenses were $19.4 million. down slightly from the same period last year. Stock-based compensation expense was 2.4 million in the quarter. We reported research and development expenses of 8.5 million, up 0.1 million from the same period last year. Our growth R&D spending in the third quarter was 11.4 million, which includes 2.9 million that was billed to our OEM customers and is treated as counter-R&D expense. Our G&A expenses were $10.9 million, down $2.4 million from the same period last year. This decline was primarily driven by lower insurance premiums and lower marketing, accounting, and audit-related expenses. Through the first nine months of 2023, cash used in operations was $43.9 million and capital expenditures were 12.3 million. Importantly, our balance sheet remains very strong. We ended the third quarter with combined cash, cash equivalents, and marketable securities of 342 million. We continue to believe our liquidity is sufficient to reach commercialization. Our updated guidance for cash usage in 2023 is now 85 to 105 million. This is comprised of cash usage from operations of 65 to 75 million and for capital expenditures in the range of 20 to 30 million. We continue to be very prudent with our cash. We have a very practical process to evaluate where we should spend our cash in order to execute on our business plan and drive our commercialization roadmap forward. while we keep investing in core material innovation with the goal to always stay ahead of a competition. As Xichao mentioned, we're in the final stages of completing our vendor qualification review for line four and line five in preparation for B sample. We expect the bulk of our capital expenditures for line four and line five to fall in the first half of calendar year 2024. We're making significant progress and remain on track for transition to B-samples by the end of this year. Our strong liquidity position allows us to continue investing in our next generation manufacturing lines to support our OEM customers while continuing to innovate at the forefront of battery material science and to attract and retain top talent. We are very thankful for all the support we have received from our OEM customers and shareholders. With that, I'll hand the call back to Eric.
spk06: Thanks, Jing. Bruno, let's open the line for questions.
spk04: Perfect. Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. That's star 1 on your telephone keypad. To withdraw the question, star followed by 2. And please also remember to unmute your microphone when you turn to Our first question comes from Winnie Dong from DB. Winnie, your line's not open. Please go ahead.
spk03: Yes, thank you so much for taking my question. I was wondering if you can describe sort of how the next month of work will look like in the context of transitioning to B-sample. You know, what are some of the key you know, data points or transitions to look forward within the next few months, heading into 2024 as you're preparing line four and five. Thanks.
spk09: Yeah, that's a good question. So, from a contractual perspective, basically we're going through the standard legal and the financial process to getting the document signed. And then from a practical work perspective, so, one key thing that we have to demonstrate is safety hazard level five. And then we've already demonstrated hazard level five at a small cell level. And then in the next few months, we need to further verify hazard level five at larger cell level. So the safety is a key thing. And then A sample was really about demonstrating the chemistry and the cell design. And then now B sample In B sample, we are going to build about five to 10 cars worth of batteries. So now safety and then practical safety actually becomes really important. So they want to see very detailed testing under very detailed testing parameters. And then both at the small cell level and also the large cell capacity level. And also we are also in the process of completing vendor qualification so that we can start building the line for B-sample. So the B-sample will likely take about a year to a year and a half, so complete by end of 2024 to mid-2025. Got it.
spk03: And then earlier on this year, I think you guys have spoken about talent acquisition as one of the key initiatives this year. I was wondering, with the year almost ending, are you where you hope to be or need to be with your sort of like talent composition?
spk09: Yeah. Yeah, so talent, I mean, we always want more and better. And we're never satisfied with talent acquisition. And the market is very competitive. which is a good thing. I mean, it's a, it's a really exciting market. And then, and you can probably tell that the kind of people that we're trying to hire battery engineers, material scientists, AI scientists, these are very much in demand almost around the world. So I'm sure we can always do better, but actually recently we actually made some pretty For example, on the material science side, we hired our chief scientist, Kang Shui. He's one of the world's most renowned experts in battery electrolytes. And also on the cell engineering side, we also made a few hires recently, and these guys have extensive experience from the big Korean battery companies. So actually recently we made quite a bit of progress and then that allows us to beef up our team for the B sample and also to expand to eVTOL. So we're going to have, so in the past we had three teams for the three A samples and now we're going to keep beefing up our team to go from A to B and also expand into eVTOL. So we're making good progress, but never enough.
spk03: Um, thanks for that. And then maybe a more high level questions, just in the context of, um, like recent narrative around. Maybe adoption curves, um, that may be, you know, not coming as strong as expected. Sort of get that from, from suppliers when you hear that from, from OEMs, um, understanding that you guys are sort of, um, in the, in the product development phase, but do you hear any of this from your, any of your JDA partners? in terms of, you know, the adoption curve moving forward, not coming in as strong. Anything color, any colleagues in fact there? Thanks.
spk09: Yeah, I think, I mean, the adoption curve can always be impacted by, for example, the economy and the other factors. But the overall, the overall trend, that's, And then especially these OEMs like GM and Honda, which I would say are behind the newcomers like the Tesla and NIO, they are very much committed to EV adoption. So there might be some impact by the economy and other factors, but in terms of the battery roadmaps, no change there.
spk03: Thank you so much, El Paso.
spk05: Thank you.
spk04: Our next question comes from Sean Severson from Washertower Research. Sean, the line's not open. Please go ahead.
spk08: Great. Thanks. Good morning, everyone. I was wondering if you could talk a little bit about the air mobility space, and I'm trying to understand I guess for lack of a better word, the synergies between the automotive and transportation side and what you're doing in air mobility, and then extending from that a little bit of the timeline of what we'd be looking at in the urban air mobility space.
spk09: Yes, John. That's a really interesting question. All the work that we are doing with the EV OEMs in A sample and in B sample, building up the line, improving the quality, improving the cell design, the safety, the performance, almost all of that get transferred to the eVTOL because eVTOLs, the urban air mobility, need all the parameters that the EV OEMs require, the safety, actually even more rigorous safety requirements, the cell design, the quality, they need all of that. And then what's better is that for the EV OEMs, you have, I mean, even though the EV OEMs are very committed to lithium metal, you still have the incumbents like LG, CATL, Samsung, SK, the big companies that are very much invested in the EV space. Whereas for eVTOL, it's And then some of the bigger companies are less interested in the eVTOL because they think the near-term market is smaller. But then for us, for next-gen batteries, it's really exciting. For example, say one eVTOL is about two cars in terms of batteries, right? So in the EVB sample, we built 10 cars worth of batteries. That's just a B sample for EV. But 10 cars worth of batteries, that's five eVTOLs worth of batteries. If we supply five eVTOLs worth of batteries to the likes of Joby, Archer, the eVTOL companies, then that's actually considered commercial. And the volume is smaller, but then the margin, the economics are much more favorable. And also, it's a new market, so the standards have not been set yet. And then we have the opportunity, being the first mover in lithium metal for eVTOL, we have the opportunity to set the standards. And then once you set the standards, then the FAA or Europe, the EASA, then they will adopt the standards. Then our lithium metal could be the first FAA-certified lithium metal battery for UAM. And then once we set the standards, then we influence the next five, 10 years of certification process in this field. the impact is is really big that's very interesting and would you be able to i assume through this process get a lot of data right a lot of operating data that would apply absolutely yeah transportation is that correct absolutely absolutely and then i mean we love working with the ev companies but then those those companies tend to be bigger right and then the ev companies are more entrepreneurial and the more like-minded and uh similar size and uh and we work together and we share data and we um we also tune our business model to to fit um what the market wants so it's it's actually a really exciting market and uh evito uh is actually happening much faster than than we expect i mean next year at the paris the summer olympics um one evito company will do a demonstration flight and then Several cities around the world are beginning to have these ebutyl demonstrations. So it's actually happening much faster.
spk08: Thanks. My last question is we've had the supply chain shift in place for several quarters now in terms of pushing towards domestic supply, right, and qualifying for IRA. What's the progress report there? Have you seen things? I know you have some special relationships in your supply chain, but are you seeing that this move is being made? And as far as your strategic outlook, you feel very comfortable that you've got everything that you need at this point going forward?
spk09: Yeah. Yeah. So, very good point. And then, for example, on the annual side, and then I was at a conference with Applied Materials. So, Applied Materials, Albemarle, livened these U.S.-based lithium anode companies are building up plants in the U.S. Some of them are in North Carolina. Some are in other states as part of the IRA initiative. And then going forward, we definitely plan to purchase and qualify the anode from U.S.-based vendors. And then also in terms of lithium salt, we are working with a few partners to potentially set up facilities also in the U.S. so we can produce this salt for our high concentration solvent and salt electrolyte. And so the anode and the salt are two really key parameters to us. And then also several of our cathode vendors are already setting up plants, for example, in Canada, North America, to supply the cathode. And then once we are towards the end of the year, later stage of B sample, then we will sit down with our EV OEMs and potential eVTOL OEMs to discuss where in North America to set up a plan for the battery cells.
spk08: Great. Thanks for that, Qiqiang. Congratulations on the progress.
spk04: Yeah. Thank you, Xiao. Our next question comes from Jeff Grant from Allianz Global Partners. Jeff, your line is now open.
spk07: Good morning. A question on the transition to B-samples with the auto OEMs. Is there a way to assess, you know, how far behind? It sounds like you have kind of one kind of front runner that you're very close with. Is there a way to assess kind of how far out the other two are relative to this first one? And is having one, you know, assuming you get across the finish line, getting one to B-sample, does that kind of give you guys an ability to nudge the others since there's some third-party validation? Or is that not really... relevant as you guys have, as you guys see OEMs seeing it?
spk09: Yeah, good question. So actually the specs to transition from A to B for all the three OEMs and actually all OEMs around the world are actually quite similar, the performance and the safety. So we're going to transition to B with one of them because the testing and the type of studies and testing that we've done is the most extensive. And I would say the other two probably in terms of the gap probably can be measured in months. Just different OEMs in the past year to two years during the ASAMPLE development process, we had different timelines because we had different focus for facilities, for line set up. But the progress is different. But then I would say the overall platform, the core technical progress that we make for safety and performance, that's very transferable. And different OEMs may have different internal process for getting to the next phase. But I would say they're measured in months. But that's more on the contract level. But in terms of core technical progress, we make progress with one OEM. and then we get to B sample, and that progress can be transferable to the other OEMs.
spk07: Great. That's very helpful. And for my follow-up, more of a macro question for you guys, but obviously there's been some articles in industry talk about some slowing EV sales and some building of inventories. I think a lot of that relates to you know, cost as well as maybe some range anxiety, which are obviously things you guys can address pretty impactfully. So I'm wondering if you guys are maybe seeing any different level of urgency from your JDA partners to move a solution like yours forward, or is it pretty similar from what you guys have seen historically?
spk09: Yeah, so the OEMs have sort of – modify their focus, for example, from range anxiety to maybe safety to maybe cost. But then in terms of technology platform, the OEMs have not really changed their commitment because, for example, lithium metal, it can mean longer range, but then it can also mean lower cost because a longer range battery, if you keep the range the same, then the battery is actually smaller. So the packaging can be actually cheaper. So lithium metal can actually be designed so that it can mean longer range or lower cost to fit the OEM's target.
spk07: Understood. Great. Thank you for the time. Thank you.
spk04: As a reminder, if you'd like to ask a question, please press star 1. on the telephone keypad. That's star one on the telephone keypad. Our next question comes from Timothy Johnson. Timothy, please go ahead.
spk00: Timothy Johnson Yes, good morning and thank you for taking my question. My question concerns the lithium metal anode. There are many processes for making such an anode. They're all problematic to one extent or another. Can you please elaborate a little bit more on the process that you use to lay down your lithium metal anode and whether or not you have any major problems with this going forward? I'm also interested in the composite coating that you're putting on the lithium metal anode. You mentioned today that you've got a new coating material.
spk09: i'm wondering if you can elaborate on that thank you very much yeah so i'll try to cover the landscape the first one in terms of how to put lithium foil down as the anode there's about three main techniques for putting down lithium foil and then one is Basically, you take a thicker lithium foil and then extrude it. It's like a pasta maker. Extrude it to a thinner foil, and then you laminate onto your turn collector. And then another is physical deposition. Basically, inside the chamber, you evaporate lithium, and then that falls onto your substrate. slurry coating. You can take the lithium powder, you make a slurry, and then you coat it, and then you dry off the solvent. And there's pros and cons to each of the techniques. I would say the most mature currently is the extrusion and the lamination. That's by far the most mature process for putting down thin lithium foil. And there are disadvantages to that. For example, it's hard to make the foil wide. But we have an internal process for making the foil wide. And then that's why we're able to make the large format 100m power looking metal cells. And then the other, we're using the extrusion and lamination process for now. But we are actively testing the other two approaches because the other two approaches may offer long-term advantages over the extrusion and lamination process. For example, maybe in a year to 18 months, we might switch to the other processes and we'll keep the industry updated. And for us, the different process basically comes down to which one gives the best metrics in terms of cost, manufacturing efficiency, and performance. And then your second question about composite coating. So the composite coating, serves two purposes. One is to improve safety. A second is to improve the cycle life. And we can't really get into the details of exactly what material we use. And the industry has different types of coatings and there's different ways and different places in the cell that you can put down the coatings. So I can't really get into the details, but it's basically used to improve safety and then prevent internal short and also to improve cycle life.
spk04: Our next question comes from Bimis. It's a private investor. Bimis, your line is not open.
spk01: Please go ahead. Good morning. Thanks for taking my questions. My question is, So previously you have mentioned that a sample GD includes different cathode chemistry in addition to high nickel. Has any progress been made in other chemistry other than high nickel, such as LFP lithium metal?
spk09: Yes, so actually in a sample we tested both high nickel and also mixtures of those two. And then in B sample, we will continue to test these different cathodes. And the reason that we do that is now that we are in B sample, and then we need to finalize the cell design. But the final output of B sample is basically we have to finalize the cell design. And one of which is what cathode we're going to use. And then these different cathodes will have different points on the SPDR chart in terms of safety, cycle life, and cost. And this may vary for the different types of vehicles, even within the same OEM. Many OEMs will have, for example, the premium brand and the economy brand. And then, of course, they would wish to have one standard unified cell with a unified cathode, but that's not likely. So we are actually testing high nickel and the different types of high nickel, LFP, different versions of LFP, and mixtures of those two. And of course, there are different ways of mixing those two. And we evaluate, at the end of the day, the performance, energy density, and the overall set of parameters.
spk01: So during the battery role, do you plan to share the data on other chemistries other than lithium metal?
spk09: No. So all the data will be for lithium metal. The cathodes may come from a combination of high nickel and LFP. But they're all lithium metal. We don't make any other cells. We only make lithium metal cells.
spk01: Okay. So related to line four and five, line four and five are designed for B samples. Since eVTOL has a lower volume, can line five be used for commercialization for eVTOL?
spk09: Exactly. Very good question. And I think Sean from Water Tower asked the same question. So line four and five are very similar. Line four is for EV, but then it's 10 cars of batteries a year. And that's considered B sample for EV. Line five, we can make 10 cars or five EV tolls worth of batteries per year. But that's commercial. That's considered commercial because in EV, no OEM will give you an order for 10 cars, right? But then in eVTOL, a lot of the eVTOL companies will happily give you an order for three aircrafts or five aircrafts. And these are very high margin, and these help us set the standards in the industry. So yeah, line five will be for eVTOL commercial.
spk01: So if that's the case, will there be a C sample line just for eVTOL or... Line 5 is more like the C sample and SOP for eVTOL.
spk09: Yeah. Yeah, so eVTOL OEMs don't really divide the phases as clearly as the EV OEMs. So B, C, SOP are sort of mixed together.
spk05: Thanks for your time.
spk04: Thank you. We currently have no further questions, so I would like to hand the call back to the management team for closing remarks. Over to you.
spk09: Yeah, so thanks, everyone, for tuning in and also supporting us. And it's not been easy for us to get to this point, and we're very close to entering B-sample for EV applications. And then all the solid foundation that we've built with EV OEMs, we plan to definitely continue to work with our EV OEMs. And we continue to have a very good relationship and partnership with them. At the same time, we plan to take this solid foundation that we built, modify it for eVTOL applications. It's a totally new field. It's a field that's happening much faster than we expected. And it's a field that, like I mentioned earlier, We really believe that in this decade, 2020, lithium metal is going to enable eVTOL the same way that lithium ion eVTOL enabled consumer electronics 30 years ago in the 1990s. So it's a really exciting field for the future of transportation as well as lithium metal batteries. So really appreciate everyone's
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